May 17, 2014

The 31-year-old CEO of Coinbase, Brian Armstrong, on his plan to becomethe world payment processor for the virtual currency. Could this be the end of credit cards?

San Francisco

As I drive into San Francisco to meet tech entrepreneur Brian Armstrong, reminders of the California Gold Rush pop up everywhere, from Levi Strauss to the San Francisco 49ers. Various modern gold rushes have periodically swept the area for the past few decades, and the 31-year-old Mr. Armstrong is at the forefront of the latest frenzied scramble: virtual currency.

Bitcoin is the dominant player in the field, and Mr. Armstrong, as the CEO of Coinbase, thinks he has found a rich vein to mine. He wants to be the Visa and MasterCard of Bitcoin payment processing, taking those behemoths out of the picture as merchants and customers move to virtual transactions.

Credit-card companies "collect $500 billion in fees" today, he says confidently as we meet in the company conference room overlooking San Francisco Bay. As commerce eventually turns increasingly virtual and credit-card fees drop to match cheaper technology, he says, "it's going to be $50 billion."

But wait . . . Bitcoin? A lot of people still aren't sure what a virtual currency is, much less what a "Bitcoin wallet" like Coinbase might be. Mr. Armstrong offers a working Bitcoin definition for starters: "It's a distributed digital currency. There's no central authority. It's based on a consensus of people working on this around the world. It's both a currency and a payment method and a protocol, a commonly agreed-upon language so that computers can talk to each other and exchange currency or payments, at least at first."

The number of Bitcoins is capped at 21 million (about 12 million have been generated so far by an algorithmic method using Bitcoin's agreed-upon protocol), making them immune to the sort of government money-pumping or -restricting policies that can send real-world currencies up or down. Bitcoins are simply worth whatever those who trade in them agree they're worth.

The peer-to-peer payment system has suffered some public-relations disasters: In 2013, the FBI shut down the platform Silk Road, which may have earned $80 million in commissions from allegedly facilitating more than $1 billion in drug trafficking. The biggest Bitcoin exchange—Mt. Gox in Japan—collapsed in February. In the process Mt. Gox lost $450 million in Bitcoins, though they seem to have been later rediscovered—it's still not clear, which reflects the moving-target reputation of Bitcoin that still makes many investors wary.

"There are still people who we meet who say there is no way the government is going to let this happen," Mr. Armstrong says, "but they don't have the information we have." So far, he seems to have embraced the prospect of regulation in a nascent industry with an all too Wild West reputation.

May 13, 2014

When the price hits $35 or less, it will have an astonishing global impact.

An iPhone costs $649. Other makers are talking about the $35 smartphone, or maybe even $25. That might explain why Apple has been so litigious over patents and why the company is spending big—about 30% more than last year—to develop new features. On May 2, Apple was awarded $119 million in damages after a court ruled that Samsung had infringed on patents by copying Apple's features, designs and technology. But damage payments won't stop what's coming for the industry: We're entering a revolutionary era of the cheap smartphone.

About 285 million smartphones were shipped in the first quarter of 2014, according to Strategy Analytics, and more than a billion will ship this year. Not cellphones—smartphones. Samsung and Apple accounted for almost half of them.

The business is staggeringly lucrative. The research firm iSuppli rips apart smartphones to figure out what the materials cost. iSuppli estimates that the materials in an 16-gigabyte iPhone 5S cost $191, though the product sells for $649 without a contract with AT&T or Verizon. The iPhone 5C materials come in at $166, selling for $549 without a contract. The Samsung Galaxy S5 contains $251 of materials.

But we're not buying chips and glass. What we pay for is the experience of the look, feel and touch—for the software, operating system, graphical user interface and apps. Samsung and most of the other 85% non-Apple smartphones use Android, which Google provides free, making up for Android development costs by selling boatloads of search ads.

Apple thinks that its software is, unlike Android, worth more than free. The company filed the patent suit against Samsung and HTC to slow down Android's development, but also to try to maintain the value of Apple's code-writing that provides all the magical features. But it has been seven years since the iPhone was introduced. Commoditization, when consumers realize that your product is no different from what your competitor sells, is creeping up. When personal computers began, they sold for $5,000. Google now sells a laptop for $249. The same downward price pressure is about to happen with smartphones.